China’s Stock Market – The Ghost Of ’29

The Shanghai composite rallied more than 60 percent from January to its mid-June high, then took a sharp turn lower, losing more than 23 percent of its value in the past 30 trading sessions. Since hitting a low of 3,507 last week, the index has bounced 13 percent. And while that volatility has some investors drawing parallels to the Nasdaq collapse in 2000, one top technician says the better analogy might be the Dow in 1929.

“We are seeing some similarities to what we had seen in the Dow where you had a very parabolic advance and then a sharp correction, followed by a relief rally and then ultimately there was a parabolic decline even further,” technical analyst Craig Johnson said Friday on CNBC’s “Trading Nation.”

The Shanghai composite has shown some signs of life in the past week, rebounding nearly 8 percent for the five trading sessions. But according to Johnson, senior technical research analyst at Piper Jaffray, this kind of chart behavior is dangerous. “Traders are watching this relief rally here to see how far this is going to follow through. But those who have studied charts and looked at charts for a long time know that parabolic advances typically end poorly,” he said. “Typically you get a 110 percent retracement of the entire advance up.”

And while Johnson admits the outcome may not be exactly the same as 1929, the eerie similarities are enough to keep him away from China’s stock market.

Beyond the charts, other investors are urging caution when it comes to investing in china.

“We’re not really doing any direct investing there right now and we encourage investors to be cautious,” Curtis Holden of Tanglewood Wealth Management said on “Trading Nation.”

Holden said a combination of the stock market’s price action in the past five years and the fragility of the country’s economy makes it unattractive from a fundamental standpoint—at least in the short term.

“I would tell investors right now to focus more on the developed markets and to sit tight and wait to see what happens in China,” he said.

Want to be a part of the Trading Nation? If you’d like to call into our live Monday show, email your name, number and a question to TradingNation@cnbc.com

Blog Editor:

One can only conclude we have entered a period of financial collapse already?

Wikipedia notes that the Wall Street Crash of 1929, also known as Black Tuesday,[1] the Great Crash, or the Stock Market Crash of 1929, began on October 24, 1929, and was the most devastating stock market crash in the history of the United States, when taking into consideration the full extent and duration of its fallout.[2] The crash signaled the beginning of the 10-year Great Depression that affected all Western industrialized countries.[3]

The Roaring Twenties, the decade that followed World War I and led to the Crash,[4] was a time of wealth and excess. Building on post-war optimism, rural Americans emigrated to the cities in vast numbers throughout the decade with the hopes of finding a more prosperous life in the ever growing expansion of America’s industrial sector.[5] While the American cities prospered, the vast emigration from rural areas continued to neglect the US agriculture industry, and created widespread financial despair among American farmers throughout the decade.[5] This would later be blamed as one of the key factors that led to the 1929 stock market crash.[6]

Despite the dangers of speculation, many believed that the stock market would continue to rise indefinitely. On March 25, 1929, after the Federal Reserve warned of excessive speculation, a mini crash occurred as investors started to sell stocks at a rapid pace, exposing the market’s shaky foundation.[7]